MBI - MBIA Inc.

[muscleman]

I'm a casual observer here with no position, and a long position in BAC...I think there is room for both to win.  I am curious to know why everyone is so confident in the loan from National being properly secured.  Does the possibility exist that they have pledged collateral that rightfully belongs to policy holders, despite their insistence to the contrary?

 

I am still studying those loans, but I think the loan is approved by NYDFS, and the loan itself has not caused any litigation, so it should be correctly pledged.

 

Is it possible that the insurance regulator would take both Corp and National into a Receivership role to sort everything out and then bring whatever it could back out once the overall situation with claims, inter-party loans, putbacks, fraudulent conveyance hearings is settled?

 

It is illegal to do that. That is why BAC is suing MBIA and the regulators to reverse the split.

[zippy1]

comments from Alison Frankel.

http://newsandinsight.thomsonreuters.com/Legal/News/2013/04_-_April/In_BofA_death_match,_MBIA_wins_a_round_at_N_Y__appeals_court/

I am increasingly convinced that Bank of America has no intention of reaching a global settlement with the bond insurer MBIA unless MBIA substantially reduces its expectations. The bank, as I see it, believes MBIA is demanding nearly 100 cents on the dollar for its claims that Countrywide (and BofA, as Countrywide's successor) breached insurance and servicing agreements on mortgage-backed securities MBIA agreed to insure. But BofA also believes MBIA to be in precarious financial shape, with billions in additional liability, in the form of credit default swaps with BofA, due to hit this year and beyond.

 

But the bank seems to me to be convinced that MBIA needs its money much, much more than it needs MBIA's. And BofA is willing to brave adverse rulings to prove it.

[valuecfa]

Mostly a rehash of the obvious but here ya go:

 

http://www.btigresearch.com/2013/04/02/mbia-appeals-court-ruling-means-bofa-related-losses-remain-recoverable-just-through-different-route/#ixzz2PLnM2HVH

 

another rehash, but i like how it reads  :) :

 

http://www.reuters.com/article/2013/04/02/bankofamerica-mbia-fraud-decision-idUSL2N0CP1E120130402?feedType=RSS&feedName=bondsNews&rpc=43

 

[valuecfa]

Bottomsup, didn't you post a link to guidelines on rehab of insurers? I could have overlooked it, but I just did a search and didn't see it anymore. Was it not applicable to monolines?

[ERICOPOLY]

In either event, I'd be curious, Ericopoly, given that you're sensitive to the likely outcome of this investment (if I'm reading you correctly), why you don't hold your nose and return to investing in MBIA?

 

I'm reminded of the recapitalization of the banks.  Folks were outraged by the bailouts, but a lot of them didn't separate their feelings from what was occurring...namely that the banks were going to survive (albeit it to different degrees) and that they could profit from this.

 

Well, now Alison Frankel validates my thinking -- so that won't help my "misunderstanding of how these negotiations are done" much:

 

http://newsandinsight.thomsonreuters.com/Legal/News/2013/04_-_April/In_BofA_death_match,_MBIA_wins_a_round_at_N_Y__appeals_court/

The bank, as I see it, believes MBIA is demanding nearly 100 cents on the dollar for its claims that Countrywide (and BofA, as Countrywide's successor) breached insurance and servicing agreements on mortgage-backed securities MBIA agreed to insure.

 

Maybe at this point I'm being held back by the thinking that BAC will be trading over $20 in a few years no matter how these trials work out, but MBI will be over $20 in a few years only if this trial works out.  So I see BAC's path as more certain.

 

Although, it does seem rather certain that MBI will eventually prevail.  I have a few questions about MBI though -- now that they've been unable to write premiums for this long is it going to be as simple as hitting a switch, or will it be slow to rebuild their brand/share?  I don't know.  So there are a few questions that I don't understand, and I'm not sure that it's a better decision to sell some BAC and buy MBI.  But I hope MBI works out great because I want the board members here to make good money.  I feel like I can be disgusted about Jay Brown's trash talking while at the same time wishing you all the best success.

[muscleman]

In either event, I'd be curious, Ericopoly, given that you're sensitive to the likely outcome of this investment (if I'm reading you correctly), why you don't hold your nose and return to investing in MBIA?

 

I'm reminded of the recapitalization of the banks.  Folks were outraged by the bailouts, but a lot of them didn't separate their feelings from what was occurring...namely that the banks were going to survive (albeit it to different degrees) and that they could profit from this.

 

Well, now Alison Frankel validates my thinking -- so that won't help my "misunderstanding of how these negotiations are done" much:

 

http://newsandinsight.thomsonreuters.com/Legal/News/2013/04_-_April/In_BofA_death_match,_MBIA_wins_a_round_at_N_Y__appeals_court/

The bank, as I see it, believes MBIA is demanding nearly 100 cents on the dollar for its claims that Countrywide (and BofA, as Countrywide's successor) breached insurance and servicing agreements on mortgage-backed securities MBIA agreed to insure.

 

Maybe at this point I'm being held back by the thinking that BAC will be trading over $20 in a few years no matter how these trials work out, but MBI will be over $20 in a few years only if this trial works out.  So I see BAC's path as more certain.

 

Although, it does seem rather certain that MBI will eventually prevail.  I have a few questions about MBI though -- now that they've been unable to write premiums for this long is it going to be as simple as hitting a switch, or will it be slow to rebuild their brand/share?  I don't know.  So there are a few questions that I don't understand, and I'm not sure that it's a better decision to sell some BAC and buy MBI.  But I hope MBI works out great because I want the board members here to make good money.  I feel like I can be disgusted about Jay Brown's trash talking while at the same time wishing you all the best success.

 

This is why I am long both MBI and AGO. AGO will do well no matter what. All of its major cases are already settled. I would even be happier if AGO goes up first and MBI stays depressed for a while longer. In that case I could switch all into MBI.

[Guest bottomsup]

I didn't, but I'm happy to share what I've found so far.

 

Here is a guide to the Article 74 process:

http://www.nylb.org/NYSInsuranceLaw.htm

 

And I dug up this document because it addressed perfected interests and derivatives (a NY attorney co-authored the document, so there are some pointers to relevant precedence):

http://apps.americanbar.org/buslaw/newsletter/0073/materials/pp1.pdf

 

 

Bottomsup, didn't you post a link to guidelines on rehab of insurers? I could have overlooked it, but I just did a search and didn't see it anymore. Was it not applicable to monolines?

[Guest bottomsup]

Thanks Ericopoly, I appreciate your comments and good wishes.

 

I'm long BAC, as well, and agree that its path to $20 seems a little more certain in terms of timing.

 

That said, Herzeca makes an interesting point in his recent post (http://mbibaclitigtion.blogspot.com/2013/04/time-for-nydfss-lawsky-to-slap-some.html) which matches my understanding of Article 74 thus far, namely that under rehabilitation, if MBIA is being unreasonable, Lawsky may simply finally settle in a way that is more reasonable.  That could ultimately drain the value of MBIA Corp, however, litigation uncertainty would presumably be lifted, the secured loan would be paid, National would have its ratings upgraded and we'd be off to the races.

 

Your comment about flipping on a switch is something I'm unclear on, though it seems to me that Detroit, Stockton, etc. are likely to demonstrate a continued need for insurance, demanded by bond investors.

 

 

In either event, I'd be curious, Ericopoly, given that you're sensitive to the likely outcome of this investment (if I'm reading you correctly), why you don't hold your nose and return to investing in MBIA?

 

I'm reminded of the recapitalization of the banks.  Folks were outraged by the bailouts, but a lot of them didn't separate their feelings from what was occurring...namely that the banks were going to survive (albeit it to different degrees) and that they could profit from this.

 

Well, now Alison Frankel validates my thinking -- so that won't help my "misunderstanding of how these negotiations are done" much:

 

http://newsandinsight.thomsonreuters.com/Legal/News/2013/04_-_April/In_BofA_death_match,_MBIA_wins_a_round_at_N_Y__appeals_court/

The bank, as I see it, believes MBIA is demanding nearly 100 cents on the dollar for its claims that Countrywide (and BofA, as Countrywide's successor) breached insurance and servicing agreements on mortgage-backed securities MBIA agreed to insure.

 

Maybe at this point I'm being held back by the thinking that BAC will be trading over $20 in a few years no matter how these trials work out, but MBI will be over $20 in a few years only if this trial works out.  So I see BAC's path as more certain.

 

Although, it does seem rather certain that MBI will eventually prevail.  I have a few questions about MBI though -- now that they've been unable to write premiums for this long is it going to be as simple as hitting a switch, or will it be slow to rebuild their brand/share?  I don't know.  So there are a few questions that I don't understand, and I'm not sure that it's a better decision to sell some BAC and buy MBI.  But I hope MBI works out great because I want the board members here to make good money.  I feel like I can be disgusted about Jay Brown's trash talking while at the same time wishing you all the best success.

[JRH]

Your comment about flipping on a switch is something I'm unclear on, though it seems to me that Detroit, Stockton, etc. are likely to demonstrate a continued need for insurance, demanded by bond investors.

 

I realize it is just speculative game theory, but it seems to me that BoA is waiting to see if MBIA will blink in allowing MBIA Corp. to be put into rehabilitation rather than settle for less than they (MBIA) want.

 

- Moynihan has suggested during the BoA conference call (if I remember correctly), that they have basically written down their receivable from MBIA Corp to almost nothing (I assume this has to mean the future payments on the CDS that may soon go into default but maybe someone else can set me straight?  It is also possible I misunderstood and he was referring to what they are booking their reserves at for the litigation or future settlement.)

- Berkowitz has said (I paraphrase) that MBIA's restored franchise value might be equal to its runoff value (in other words, when they're writing new business again, they're worth 2x prior over a reasonable amount of time).

- MBIA's reputation is a huge intangible asset in writing new business, like most insurance companies.  The difference between throwing MBIA Corp into bankruptcy, and not doing that, is huge in regard to their franchise value after the dust clears.  Doesn't really matter that MBIA Corp and National are two separate entities from the point of view of customers and reputation - it's easy fodder for competitors to use.

[muscleman]

I didn't, but I'm happy to share what I've found so far.

 

Here is a guide to the Article 74 process:

http://www.nylb.org/NYSInsuranceLaw.htm

 

And I dug up this document because it addressed perfected interests and derivatives (a NY attorney co-authored the document, so there are some pointers to relevant precedence):

http://apps.americanbar.org/buslaw/newsletter/0073/materials/pp1.pdf

 

 

Bottomsup, didn't you post a link to guidelines on rehab of insurers? I could have overlooked it, but I just did a search and didn't see it anymore. Was it not applicable to monolines?

 

It says: "New York Department has the authority to invalidate perfected pledges of assets and grants of security interest."

Hmm... So this would be the worst case scenario, but clearly this is not in the interest of NYDFS. Their goal is to stabilize the insurance market, so at the minimum they will get National loan paid in full. After all, they are the one who approved the 2009 split, which shows that their goal is to make National a solid company.

[muscleman]

In either event, I'd be curious, Ericopoly, given that you're sensitive to the likely outcome of this investment (if I'm reading you correctly), why you don't hold your nose and return to investing in MBIA?

 

I'm reminded of the recapitalization of the banks.  Folks were outraged by the bailouts, but a lot of them didn't separate their feelings from what was occurring...namely that the banks were going to survive (albeit it to different degrees) and that they could profit from this.

 

Well, now Alison Frankel validates my thinking -- so that won't help my "misunderstanding of how these negotiations are done" much:

 

http://newsandinsight.thomsonreuters.com/Legal/News/2013/04_-_April/In_BofA_death_match,_MBIA_wins_a_round_at_N_Y__appeals_court/

The bank, as I see it, believes MBIA is demanding nearly 100 cents on the dollar for its claims that Countrywide (and BofA, as Countrywide's successor) breached insurance and servicing agreements on mortgage-backed securities MBIA agreed to insure.

 

Maybe at this point I'm being held back by the thinking that BAC will be trading over $20 in a few years no matter how these trials work out, but MBI will be over $20 in a few years only if this trial works out.  So I see BAC's path as more certain.

 

Although, it does seem rather certain that MBI will eventually prevail.  I have a few questions about MBI though -- now that they've been unable to write premiums for this long is it going to be as simple as hitting a switch, or will it be slow to rebuild their brand/share?  I don't know.  So there are a few questions that I don't understand, and I'm not sure that it's a better decision to sell some BAC and buy MBI.  But I hope MBI works out great because I want the board members here to make good money.  I feel like I can be disgusted about Jay Brown's trash talking while at the same time wishing you all the best success.

 

Now that the 2009 split is upheld in court, even if the R&W doesn't work out in trial, MBIA will still be in the $20s, right? Unless BAC wins the appeal of the 2009 split.

But for BAC, if the article 77 goes against it, it will not be in the $20s. The bondholders in article 77 lost over $100 bn. If the judge rules that BAC has to pay 100% of that loss, then BAC is dead.

[Guest bottomsup]

That's a continuation of a paragraph on the preceding page, which says:

 

"It should be noted, however, that neither OGC Opinion No. 2000-67 nor the cited case provide that the New York Department has the authority to invalidate perfected pledges of assets and grants of security interest."

 

Slight difference. ;)

 

I didn't, but I'm happy to share what I've found so far.

 

Here is a guide to the Article 74 process:

http://www.nylb.org/NYSInsuranceLaw.htm

 

And I dug up this document because it addressed perfected interests and derivatives (a NY attorney co-authored the document, so there are some pointers to relevant precedence):

http://apps.americanbar.org/buslaw/newsletter/0073/materials/pp1.pdf

 

 

Bottomsup, didn't you post a link to guidelines on rehab of insurers? I could have overlooked it, but I just did a search and didn't see it anymore. Was it not applicable to monolines?

 

It says: "New York Department has the authority to invalidate perfected pledges of assets and grants of security interest."

Hmm... So this would be the worst case scenario, but clearly this is not in the interest of NYDFS. Their goal is to stabilize the insurance market, so at the minimum they will get National loan paid in full. After all, they are the one who approved the 2009 split, which shows that their goal is to make National a solid company.

[muscleman]

That's a continuation of a paragraph on the preceding page, which says:

 

"It should be noted, however, that neither OGC Opinion No. 2000-67 nor the cited case provide that the New York Department has the authority to invalidate perfected pledges of assets and grants of security interest."

 

Slight difference. ;)

 

I didn't, but I'm happy to share what I've found so far.

 

Here is a guide to the Article 74 process:

http://www.nylb.org/NYSInsuranceLaw.htm

 

And I dug up this document because it addressed perfected interests and derivatives (a NY attorney co-authored the document, so there are some pointers to relevant precedence):

http://apps.americanbar.org/buslaw/newsletter/0073/materials/pp1.pdf

 

 

Bottomsup, didn't you post a link to guidelines on rehab of insurers? I could have overlooked it, but I just did a search and didn't see it anymore. Was it not applicable to monolines?

 

It says: "New York Department has the authority to invalidate perfected pledges of assets and grants of security interest."

Hmm... So this would be the worst case scenario, but clearly this is not in the interest of NYDFS. Their goal is to stabilize the insurance market, so at the minimum they will get National loan paid in full. After all, they are the one who approved the 2009 split, which shows that their goal is to make National a solid company.

 

Hahaha.... Here you go....

My slight mistake then.  :-[

Anyway, it is a headache to plow through these documents, especially for me because English is not even my native language.

To be honest, I think my English is improving fast by reading these documents.

[Cardboard]

"But for BAC, if the article 77 goes against it, it will not be in the $20s. The bondholders in article 77 lost over $100 bn. If the judge rules that BAC has to pay 100% of that loss, then BAC is dead."

 

That is a very remote possibility IMO, but when things are in the hands of judges anything can happen. That is one reason why I dislike Moynihan so much with this stupid risk taking and carrying a bunch of uncertainty for BAC shareholders. The net sum to be disbursed here is small potatoes for BAC and it is totally untrue that MBI is waiting for 100% plus interest. The man mentioned many times: "economical settlement". When you settle, you get less than 100%. The thing is that once again Moynihan perched in his ivory tower with his huge company has tried to play tough on them for a few years now while these guys have been able to figure out that the law would end up being on their side. As the case gets stronger with the passage of time, then the trend moves toward 100% collection, but never gets there if settled. Why would they get the same pennies on the dollar as others who have not figured it out or did not do the hard work? By the way, they are not suing all the mortgage issuers out there on which they experienced losses, but only the ones who committed fraud, who lied to them on paper when they accepted to insure their loans.

 

There is also this belief that BAC could have put Countrywide into bankruptcy and walked away. Why didn't they do it if it would have saved them billions of dollars? To be nice people??? Is it another Moynihan mistake to add to the long list? IMO, the truth is very different than what we are being told. I highly suspect that BAC and Merrill were also up to their eye balls with subprime mortages that were poorly documented and that Countrywide, while not being clean for sure, is now used as the dumping ground or excuse for all their issues. That is likely why it is taking so long for earnings to appear and that they are not using discontinued operations accounting in their income statement to show this garbage aside. 

 

Some talk about moral hazard. The truth is that Joe Brown lost millions of dollars due to the housing debacle. Moynihan on the other hand lost nothing, but got rewarded big time becoming CEO and rich. So if Joe Brown let MBI do what it did while he was Executive Chairman knowing that Countrywide was practicing fraud on a grand scale, he is not a bad actor, nor a good actor, but an idiot. I don't know what kind of control he held over the CEO between 2004 and 2007, but using the logic that he would be made whole by courts if things went haywire has obviously not worked out and will not.

 

Cardboard

[ERICOPOLY]

The bondholders in article 77 lost over $100 bn. If the judge rules that BAC has to pay 100% of that loss, then BAC is dead.

 

There is no way that it's dead.  Any ruling against BAC gets appealed, and the settlement amount would go up.

 

BAC is at something like 9.5% capital ratio today under basel III.

 

Every 100 bps of capital ratio is about $14bln. 

 

Let's say the settlement grows from $8.5bln to $40bln.  That's about $31.5 bln increase, or 225 bps of capital ratio.  So it drags them down to 7.25%.

 

Hardly dead by any stretch, even if they had to immediately boost reserves $31.5 billion.

 

At that point, BAC only needs to boost it's capital by 125 bps to get back in the game for capital return.  That would take only $17.5 billion pre-tax earnings.  At current pace, that would take about a year.

 

So they can be at 8.5% Basel III by this time next year even if they today announce that they are boosting their settlement reserves all the way to $40bln from $8.5bln.

 

Then if the appeals process takes 3 years, you can up the amount to at least $80-$90 billion with BAC still painting it's nails.

 

 

 

[Cardboard]

So even if it is not dead, you think it would be a wise decision to risk losing $31.5 billion per your math for about $2 billion net while they will end up paying for sure at least $1 net plus all their lawyers no matter what?

 

Cardboard

[nkp007]

So even if it is not dead, you think it would be a wise decision to risk losing $31.5 billion per your math for about $2 billion net while they will end up paying for sure at least $1 net plus all their lawyers no matter what?

 

Cardboard

 

I'm going to take the bet that says BAC's lawyers know enough about their worst-case exposure than to take such a risk.

[MYDemaray]

In addition -- for everyone saying Moynihan is unreasonable -- Moynihan has already demonstrated that he will settle for reasonable amounts.  As Frankel put it in her latest "BofA continues to show that it's willing to settle on what it considers to be reasonable terms, most recently in its $165 million MBS deal with the National Credit Union Administration, which was announced Tuesday."

 

He simply thinks Brown is being unreasonable.

[racemize]

In addition -- for everyone saying Moynihan is unreasonable -- Moynihan has already demonstrated that he will settle for reasonable amounts.  As Frankel put it in her latest "BofA continues to show that it's willing to settle on what it considers to be reasonable terms, most recently in its $165 million MBS deal with the National Credit Union Administration, which was announced Tuesday."

 

He simply thinks Brown is being unreasonable.

 

He also settled the government agencies for more than the normal rates/what was expected, so it seems like Brown must really be demanding a lot. 

[twacowfca]

Ericopoly,

...

BAC bought Countrywide and all the assets AND liabilities that came with it. That is the way the law works. That is the risk that they chose to take when they bought Countrywide.

 

I don't need to be told this.  This is not an area where I disagree.  Thus I don't complain about the settlements that they've made thus far.

 

The kind of thing that I hate is when a bad actor points a finger at another bad actor, and meanwhile declaring himself clean.  That's really what I'm complaining of.  You can see it in his letters where he explicitly calls BofA a bad actor in the financial crisis... this coming from someone who knowingly wrapped Countrywide's bad loans hoping to:

A)  pocket the premiums if loans don't go bad

B)  just rely on the courts for R&W claims if they do go bad.

 

I feel like if people who tried this sort of thing bore the consequences of their counter-party's solvency, then a lesson would be taught in doing due diligence for the loans you agree to wrap with insurance.

 

It is relatively expensive for society to protect people through the courts who knowingly wrap bad loans as a no-risk strategy.

 

Thus, a bad actor gets away with it.  I wish things worked out differently for him and he could be taught a lesson in responsibility.  Mostly, because he continues to run his mouth about this being BofA's cause and not his own.  A little bit of admission of guilt from him and I'd be fine with it.  But if we walks away from this bearing 0% of the losses, and no admission of guilt, I might feel a bit like another bad actor walked away from the crisis without a scratch.

 

Now, would a good actor knowingly wrap a bad loan from Countrywide with the attitude that if it goes bad he'll just take it to the courts for for R&W recoveries?

 

This isn't related to my being a BAC shareholder -- I'm happy for them to pay their share per all the rest of the settlements.  100% is where I draw the line, because it just rewards people like Brown for their seedy strategy.

 

Of course, this all assumes that Brown knew Countrywide was underwriting sub-par loans.  I guess that can just be my assumption that I cannot prove.

 

How much or estimate has BAC reserved specifically for MBIA's claims against them?

[HJ]

I'm sure people have discussed this here before, what about the theory that Bank of America may have bought CDS on MBIA to cover their $8.5 billion CMBS exposure?  Depending on the trigger event for those CDS's, they may well prefer to put MBIA into bankruptcy first, get paid out on their protection on MBIA risk, and then negotiate whatever settlement they can with the entity in rehabilitation?

[racemize]

How much or estimate has BAC reserved specifically for MBIA's claims against them?

 

I believe this is undisclosed as it is in their litigation reserves.

[twacowfca]

How much or estimate has BAC reserved specifically for MBIA's claims against them?

 

I believe this is undisclosed as it is in their litigation reserves.

 

Any clue as for example as a % of total litigation reserves?  That sort of estimate was what Ben Graham did so well in his prime, even regressing his calculations as inputs changed over time.

[muscleman]

The bondholders in article 77 lost over $100 bn. If the judge rules that BAC has to pay 100% of that loss, then BAC is dead.

 

There is no way that it's dead.  Any ruling against BAC gets appealed, and the settlement amount would go up.

 

BAC is at something like 9.5% capital ratio today under basel III.

 

Every 100 bps of capital ratio is about $14bln. 

 

Let's say the settlement grows from $8.5bln to $40bln.  That's about $31.5 bln increase, or 225 bps of capital ratio.  So it drags them down to 7.25%.

 

Hardly dead by any stretch, even if they had to immediately boost reserves $31.5 billion.

 

At that point, BAC only needs to boost it's capital by 125 bps to get back in the game for capital return.  That would take only $17.5 billion pre-tax earnings.  At current pace, that would take about a year.

 

So they can be at 8.5% Basel III by this time next year even if they today announce that they are boosting their settlement reserves all the way to $40bln from $8.5bln.

 

Then if the appeals process takes 3 years, you can up the amount to at least $80-$90 billion with BAC still painting it's nails.

 

But as soon as the ruling comes out, BAC has to deposit the money into a trust account during appeal time, and pay about 9% interest on that.

BAC cannot afford to have $100 bn deposit into a trust account. That would be the entire common tangible book value of BAC.

Though I think the probability of this happening is less than 1%, we all know it is greater than 0%. Why would BAC take such a risk of a potential wipe out, just to save about $1 bn more by not settling with MBIA immediately?

[muscleman]

In addition -- for everyone saying Moynihan is unreasonable -- Moynihan has already demonstrated that he will settle for reasonable amounts.  As Frankel put it in her latest "BofA continues to show that it's willing to settle on what it considers to be reasonable terms, most recently in its $165 million MBS deal with the National Credit Union Administration, which was announced Tuesday."

 

He simply thinks Brown is being unreasonable.

 

I think he is treating Uncle Sam differently than MBIA.

MBIA is liquidity strained, so if he drags the case long enough, MBIA will not be able to pursue 100% claim plus interest.

However, Uncle Sam has unlimited staying power, and has the leverage of pursuing criminal charges. That is totally different.